How is the momentum that we learned in physics, related here in trading?

<p id="isPasted">The concepts of momentum in physics and trading share some similarities but also have important differences. Here's a breakdown:</p><p><strong>Similarities:</strong></p><ul><li><p>Direction and magnitude:&nbsp;In both physics and trading,&nbsp;momentum refers to the direction and magnitude of a movement.&nbsp;In physics,&nbsp;it's an object's mass multiplied by its velocity.&nbsp;In trading,&nbsp;it's often measured by price changes over time.</p></li><li><p>Inertia:&nbsp;Both systems tend to maintain their current state of motion (upward or downward) unless acted upon by external forces.&nbsp;In physics,&nbsp;this is due to inertia,&nbsp;while in trading,&nbsp;it can be attributed to factors like trend continuation patterns or investor sentiment.</p></li><li><p>Acceleration: Momentum increases can lead to further acceleration in the same direction.&nbsp;This can be observed in both physics (e.g.,&nbsp;a rolling ball gaining speed) and trading (e.g.,&nbsp;a strong price breakout leading to further momentum in that direction).</p></li></ul><p><strong>Differences:</strong></p><ul><li><p>Tangibility vs. abstract:&nbsp;Physics deals with tangible objects and forces,&nbsp;while trading deals with abstract concepts like prices,&nbsp;sentiment,&nbsp;and market expectations.</p></li><li><p>Predictability vs. complexity:&nbsp;Physical laws are relatively predictable,&nbsp;while market movements are complex and influenced by numerous factors,&nbsp;making precise predictions difficult.</p></li><li><p>Friction vs. market forces:&nbsp;Friction in physics slows down objects,&nbsp;while friction in trading can come from factors like transaction costs,&nbsp;profit-taking,&nbsp;and news events.</p></li><li><p>Limited lifespan vs. ongoing:&nbsp;Momentum in physics can eventually reach a steady state or dissipate entirely,&nbsp;while momentum in trading can last for varying periods depending on the market dynamics.</p></li></ul><p><strong>Trading applications of momentum:</strong></p><ul><li><p>Identifying trends:&nbsp;Traders can use momentum indicators like Moving Average Convergence Divergence (MACD) or Relative Strength Index (RSI) to identify trends and potential entry points.</p></li><li><p>Gauging market sentiment:&nbsp;Strong momentum can indicate dominant market sentiment,&nbsp;which can be used to inform trading decisions.</p></li><li><p>Risk management: Momentum can be used to set stop-loss orders and manage risk exposure during volatile periods.</p></li></ul>

<p id="isPasted">In trading, "momentum" is an analogy from physics, referring to a security's tendency to continue its current price trend, similar to how an object in motion tends to stay in motion. Traders use momentum to identify and capitalize on strong price movements, buying assets that are rising and selling those that are falling, with the goal of entering a trend early and exiting before it reverses.&nbsp;</p><p>Conceptual Link to Physics</p><p>Physics: Newton's first law states an object in motion will stay in motion unless acted upon by an external force.&nbsp;</p><p>Trading: In financial markets, a price trend (an object in motion) is expected to continue until an opposing force (like news, fundamental shifts, or increased selling pressure) slows or reverses it.&nbsp;</p><p>How Momentum Works in Trading</p><p>Trend Identification: Momentum traders look for assets experiencing strong, steady price movements.&nbsp;</p><p>Entry Point: They enter a trade in the direction of the existing trend, hoping it will persist. For example, buying a stock that is rapidly increasing in price.&nbsp;</p><p>Building Momentum: The momentum builds as more buyers or sellers join the trend, amplifying the price movement.&nbsp;</p><p>Risk Management &amp; Exit: Traders use technical analysis and indicators to determine when the trend is slowing or a peak has been reached, at which point they exit the position to secure profits or cut losses before a reversal.&nbsp;</p>